Inside Intel's family of chips, communications is now its problem child.

As the PC market shows some signs of stabilization Intel's focus turns to improving its emerging communications chip business.

Inside Intel's family of chips, communications is now its problem child.

Intel's revenues for the first quarter were about on par compared to a year ago, with a slight 1 percent increase in revenue. Typically, first-quarter revenues slide fairly dramatically from the fourth quarter, the traditional height of the sales season.

The good news is, in the words of Intel chief financial officer Stacy Smith, "the PC market is stabilizing." Overall, Intel reported net income of $1.9 billion, down 5 percent from a year ago, on revenue of $12.8 billion. But revenue within the PC Client Group totaled $7.9 billion, down just 1 percent compared with a year ago. Operating income rose, too, to $2.8 billion.

In January, Intel talked up its PC sales, noting then the relative strength of the desktop market. This time around, desktop unit sales were flat, but average selling prices were up 4 percent; notebook units sales were up 2 percent, though average prices fell 8 percent. Unfortunately, that doesn't mean recent analyst reports by Gartner and IDC were wrong; the PC market is still declining, Intel executives said. It's just that Intel benefited from an unexpected rough patch in early 2013, when shipments to PC makers were lower than expected.

A series of things started to play out in the fourth quarter and continued on in the first quarter, Intel chief executive Brian Krzanich said during the call: PC prices dropped into the $200 range; Intel began shipping more "Haswell" and Atoms into the low-cost market, and Microsoft's decision to terminate Windows XP support incited some PC users--though not many--to make the switch. "Yes, Windows XP was part of the equation, but not the driver," Krzanich said.

But Intel's PC Client business makes up about two-thirds of the company's quarterly revenue. And with the company's next-generation chip. Broadwell, set to ship in the second half of this year, Intel may feel relatively secure that its core PC business is merely leaking, not floundering. (Broadwell has been qualified for production to begin this month, executives said.) The company's attention now is focused on the mobile market.

The phone: Buying time to get it right

In the mobile space, of course, Intel faces a number of entrenched opponents, such as ARM, and its licensees, Apple, Qualcomm, and Samsung, among others. And Intel's road to compete with those vendors as has been relatively straightforward, if not simple: develop the building blocks of an embedded application processor--the processor core itself, graphics, networking, and I/O--and integrate it with the baseband radio that smartphone vendors demand.

On Tuesday, Krzanich reiterated that Asus, Dell, Foxconn and Lenovo had committed to long-term contracts to use Intel's chips--although how many products each vendor will ship remains unknown.

For now, Intel is in investment mode. "We don't go into these businesses believing we are going to lose money," Krzanich said, noting that the company has set milestones to achieve to reach profitability.

For now, though, that's exactly what's happening. Intel's Mobile and Communications Group lost $929 million for the quarter, on $156 million in revenue. Part of that is due to the fact that Intel's radio business is a step behind its rivals both from a technology and from an integration perspective. However, Intel's 7260 baseband processor will ship this quarter, Intel executives said.

According to Patrick Moorhead, principal at Moor Insights and Strategy, the 7260 "is going to be a really good competitor," Moorhead said. The challenge will be how well Intel can integrate it, he said, especially with Qualcomm employing the same strategy.

But in a weird way, that's okay. Intel's manufacturing technology, according to Krzanich and Stacy, is about two years ahead of its competition. That's helped shoulder rival AMD into more of a fringe player in certain segments. And with that, sources that analyst Moorhead talked to say that Intel's prices for "Romley" Xeon E5 chips climbed by 20 to 40 percent once AMD stopped supplying the market with a competing product. In other words, Intel is using its traditional high-margin businesses to fund new investments.

"Intel can increase prices to fund new areas like mobility," Moorhead said.